Should you use Joint Ownership to Avoid Probate Fees?

The probate process is a court application seeking an order from the Supreme Court of B.C. which confirms the legality of your Will, recognizes the executor in your Will as the person legally responsible to administer your estate, and requires the executor to administer and distribute your estate according to your Will. The court proceeding also provides a vehicle for the court to review and approve any aspect of your estate administration if an issue arises concerning it.

Probate is required if there is a dispute regarding the legality of your Will, if there is a dispute or legal issue between your executor and the beneficiaries of your estate, if there is a dispute among or between your beneficiaries regarding the estate, or if your estate includes property that can’t be transferred or sold without a probate order, such as land, a significant bank or investment account or a motor vehicle if owned as part of a substantial estate. A probate order is required because the registry or financial institution will not allow your executor to deal with this kind of property without it.

The probate fee is essentially a filing fee (or estate tax) paid to the provincial government in exchange for receiving a probate order from the Supreme Court of B.C. In B.C., probate fees based on the gross fair market value of an estate (i.e. without deduction for estate debt) as follows:

If your executor needs to engage the services of an estate lawyer to make the probate application, then legal expenses will also be incurred, which will vary depending on the circumstances.

For substantial estates, it can be very worthwhile (for your beneficiaries at least) to avoid the probate process and probate fees if possible. You can budget roughly $18,000.00 to $20,000.00 for probate and legal fees per $1 million of estate value going through an uncontested probate and estate administration process.

Income Tax Considerations

If the present market value of the joint interest in property you are transferring exceeds the original cost of the property, then one-half of that capital gain on that portion will (or should be) be reported by you on your income tax return. Similarly, any capital loss will also have to be reported. Exceptions to this include if the receiving joint owner is your spouse, if the property transferred does not have a capital gain (i.e. a bank account), or you are transferring an interest in property that has the benefit of a tax exemption, like a principal residence, or family farm property (although the other joint owner may not enjoy such an exemption moving forward).

Misapplied Joint Ownership

If you just want a new joint owner be able to access a bank account to help you manage your money and pay your bills, and to avoid probate but on condition the joint owner must distribute the bank balance according to your wishes, then you will not transfer a true legal and beneficial joint interest in the property with the intention that upon your death, the surviving joint owner receives full legal and beneficial ownership of the property as surviving joint owner. The obligation to distribute the property after your death is inconsistent with the right of survivorship. If you are using joint ownership because you need help managing your finances, then perhaps use another incapacity planning tool, like a power of attorney instead.

Risks — Loss of Ownership and Control

Other risk factors that exist when you transfer joint ownership of property to someone include the following:

1. Any interest in a jointly held property can be encumbered, and possibly seized and/or sold by a creditor(s) of any joint owner or a Trustee in Bankruptcy (a trust agreement proving the other joint owner was really just holding it for you all along will certainly help prevent this, but but it will also negate automatic survivorship rights).

2. Joint property may be divided upon the breakdown of your relationship with the other joint owner;

3. With Land, joint ownership can also be severed or terminated by any joint owner without notice to you, terminating automatic survivorship rights.

4. You no longer own the asset solely in your name and the other owner has access to it and can further transfer or encumber it or dispose of it without notice to you.

5. If you later discover that you need all of the property to pay for your own living or elder care expenses later, you may not get it back.

6. If you want your surviving joint owner to distribute the asset in any particular way after your death (ignoring the fact this may actually negate the intention to transfer a joint interest in the asset), there is always a risk that your surviving joint owner will not do so and just keep it all.

7. After transferring a joint interest in certain types of property, like land, to someone, you may become unable to make decisions relating to that property without involving the other joint owner.

8. What happens if the other owner dies before you? Will your estate planning goals be upset if you survive the other joint owner and the joint property ends up back in your estate?

Review and Balance Your Objectives

Joint ownership can be useful for incapacity and estate planning purposes provided it is actually the best solution to achieve your objectives. Seek the advice of a lawyer experienced with estate and incapacity planning to assess your situation before you act, because it is usually far easier and less expensive to plan ahead than to try and unwind a bad or unanticipated situation which may not be possible. For example, avoiding triggering a taxable capital gain which can be taxed at as much as 22% makes little sense to avoid a 1.4 % probate fee.

There are other estate planning tools to avoid probate fees, including gifting property while alive, placing property in a trust, or using dual Wills to separate the part that needs probate to be dealt with from the rest of it. There are unique advantages and disadvantages to each strategy. Why these strategies work is that you don’t personally own the property when you die or the property is owned and controlled in a manner which does not require a probate order to deal with it.

If have any further questions about avoiding probate fees with your estate planning, please contact us at Doak Shirreff in Kelowna. The loss of the previously described tax benefits for these trusts makes the process of assessing whether the benefits of doing so outweigh the ongoing costs to administer the trust more challenging. However, important benefits can still be achieved from the use of trusts in estate and incapacity planning, making their use worthwhile.